Low cost Independence

The Scottish nationalists have announced the details of their project for an independent Scotland, which includes keeping the Queen of England and the pound, and membership of the European Union, although officials from Brussels have repeatedly announced that once independent, Scotland would start its new life out of the EU and would have to apply for membership like any other external country. Two things seem to me quite extraordinary from this announcement. First, that it has taken several years for the Scottish nationalists from their commitment to independence to unveiling the details of what they exactly mean by independence. Second, what they mean by independence does not seem very independent, which seems fine to me, because I do not exactly understand the meaning of independence (or sovereignty) in the European Union and in a globalized and interconnected world. There are some differences between the Scottish nationalists’ campaign for independence and the Catalan nationalists’ campaign for independence. For example, Catalonia is relatively richer than Scotland compared to Spain or the United Kingdom respectively. Or in Catalonia the identity is based more on a native language that is spoken by a larger fraction (although not as the first language of a majority) of the population, although almost everybody speaks two languages, because since they both belong to the same language family, it is easy to speak both. One similarity between both campaigns, though, is that both reveal a preference for a sort of low cost independence. Catalan nationalists have given even fewer details of what would “independence” look like, and are also thinking hard on how to keep EU membership in any event, but when one of them threatened with a one-week general strike as part of the campaign for a referendum, the others immediately said that not even a one-day strike was on the agenda.

Resisting reforms that harm no-one

I have attended some policy debates recently on the duality of the Spanish labour market (the fact that we have a record level of temporary contracts). A few years ago, a group of economists proposed a very simple reform: to replace all contract options by basically one single fixed contract that increases the firing costs over time, leaving temporary contracts for season contracts in product markets where work is really seasonal. Since current workers with fixed contracts would keep their current contracts it is hard to understand why trade unions have so fiercely resisted such reform. Samuel Bowles, in his chapter on bargaining in his “Microeconomics” book (page 201), argues that “getting to the bargaining frontier may require new institutions or precedents, that with some probability will later be deployed to the disadvantage of one of the bargainers”. If this can be applied to labour reform in Spain, perhaps organized workers do not fear the new contract per se but fear that it will open the door somehow to them losing bargaining power. Assuring them that it will not be so is perhaps the key to a successful reform. This requires expanding the political economy traditional framework (social groups defending their interests about the particular policy at stake) to take a more comprehensive view. Acemoglu and Robinson have a recent paper on policy advise where they also claim that advisers should take into account the effect of reforms on the political power of affected groups. Perhaps in these cases it would be better to propose the reform together with a broader package that makes it more acceptable to workers, and that includes tax issues, training possibilities or participation in firm management.

"Queries": think European, read European

I participated today in an event organized by the Foundation for European Progressive Studies (FEPS) in Barcelona. I chaired an interesting debate on industrial policy, where some interesting ideas were exchanged on the relative importance of vertical versus horizontal policies, or the need to pay attention to the ideas of Dani Rodrik on the institutional design of industrial policies. The organizers took advantage of the event to present the magazine Queries, which is the first progressive European wide magazine. The event was attended by an interesting mixture of practitioners and academics, among them the economist from Columbia University Stephany Griffith-Jones. I believe that FEPS are doing interesting work in trying to get the practice of European progressive parties closer to the ideas of top left-wing academics. This kind of work is specially needed in times of great political uncertainty and volatility, when the dangers of populism and technocracy must be fought with solid arguments and well-thought strategies. The difficulties of progressive strategies at the national level must be overcome not with desperate attempts to copy the recipes of the populist, but with the update at the UE level of the principles that have worked well in the countries that have been under social-democratic governments for more years.

Are students and politicians always worse?

Teachers routinely claim that students are each year worse than the previous one. It seems that Aristotle was among the first recorded scholars to make this claim, which reveals that obviously it cannot be true. Of course students keep changing because society changes. A similar claim is made about politicians. The times of Winston Churchill and Franklin D. Roosevelt are gone, and since few people are alive to remember them, we assume that they were much better than our current politicians. Obviously this claim cannot be true either. A linear trend towards always increasing mediocrity in the quality of our politicians cannot be true. Again, politicians change with society, and the quality of individual politicians is to a large extent random. Of course, Obama is not worse than Bush, although this was worse than Clinton. But that is my opinion, and it is very difficult to establish the criteria by which they should be judged. Mandela and Lula da Silva did not possess great academic credentials, but were arguably among the best politicians ever. There are some objective aspects of reality, though, that can be used to think a little bit about this issue. For example, there are today more democracies than 30 years ago, and there are less dictatorships. Unless we argue that democratic leaders are systematically worse than dictators, it is impossible that our political leaders are linearly worse as time goes by.

Aging curves

In a previous post (for which I have received some understandable criticism) I claimed that most probably soccer player Leo Messi had already reached the peak of his aging curve in terms of professional performance. I extracted the idea from the book by Nate Silver "The Signal and the Noise". This book clarifies that aging curves are very noisy, and that there is a lot of variation around the average aging curve. It also argues correctly that different professionals have different aging curves: Olympic gymnasts peak in their teens; poets in their twenties; chess players in their thirties; applied economists in their forties... Since I turned 48 some days ago and I am an applied economist, I hope to be one of those that prove that variation is high. The location of the peak depends on physical and mental factors. Mental factors include psychological, cultural and social factors. I think that a lot of decline in academics can be explained by egos and people spending too much time on trying to keep old reputations and positions of power, rather than by capabilities. But I may be wrong. As economist Avinash Dixit once said, I think a good idea for professionals beyond the average peak is to try to behave always as if we were 23 years old. Actually, the best active economists I know are older than 60 and I don't think they have peaked. What do they have in common? They like to work hard, they are beyond vanity, and to be honest, they don't have a blog...

Do novelists know anything about politics and economics?

It is frequent to read in the newspapers articles and columns by famous writers, or interviews with them, on a variety of issues, inlcuding of course politics and economics. It is certainly not only writers who are asked about these issues, so are singers, sports players and artists. In a free world, their right to express their opinions must be respected. However, one should be aware that their opinion is in many cases as valuable as the opinion of any person walking on the street. The only difference is that the famous have more access to the media. An article by Terry Eagleton in the Times Literary Supplement criticizing the political and economic opinions of J.M. Coetzee and Paul Auster (and the correspondence between them, which has recently been published as a book) reveals that the value of their judgement on these and other issues beyond literature is close to zero. These are great writers, but the fact that you are a good writer, singer, sports player or artist does not make your opinions in any field any more interesting than anyone else’s. This is one of the reasons why one should be suspicious of the views of people (like some in political circles) who only or mostly read from newspapers, which devote a disproportionate space to the opinions of famous people.

The objective of social democracy should be sustainable progress

At a time of political and economic uncertainty, especially in Europe, it is useful to vindicate the political tradition that has provided more welfare to more people for a longer period of time: social democracy. Social democratic government experiences in northern and central European countries are the most successful ever, in terms of shared prosperity. According to the words of the late historian Tony Judt, social democracy is not only a list of government policies, but also a collection of values that are the best to navigate an uncertain globalised society. It is something of a paradox that social democratic organisations face electoral difficulties in many countries at a time when the alternatives (deregulated capitalism, communism) have failed so clearly the test of government. The social democratic model of shared prosperity means high taxation with a generous universal welfare state, a clean government, environmentally sustainable growth, excellent public education, and willingness to introduce reforms when there are crises, while maintaining the essential aspects of the model. These characteristics are compatible with open markets and large privately owned firms. The countries that have remained faithful to this model are today among the most stable and prosperous in the world. They are not a paradise, nor are they free of problems, but any proposals on how to exit a crisis should start from this benchmark.

The aim of egalitarianism should not be limited only to a static measure of equality in income. It should incorporate concern over the inheritance of inequalities, lack of social mobility and the overly high correlation between the income of parents and the income of children. It should also focus on inequality in access to power, and in the access to discrete contractual positions (weak or strong, principal or agent) that are determined by an individual’s wealth.
(The full article has been published in European Politics and Policy and can be read here).

FC Barcelona should sell Leo Messi NOW

OK, a more precise statement should be that it probably would maximize the long run probabilities of FC Barcelona winning games and titles to sell Leo Messi as soon as possible, but that I acknowledge that this will probably not happen and that broader lessons can be extracted from it. I am a Barça fan and an admirer of Messi, but professional sports’ players have an age profile such that they peak at some point between 25 and 30 years old and after this peak their performance decline (Messi will be 27 this season). Strikers that base their quality on speed, decline on average earlier than other players. That does not mean that after their peak they decline abruptly, but it may also happen. If you have an asset that is still highly valued by potential  buyers although it is about to decline in performance, the asset should be sold, because with the resources you could buy new assets that help you win more in the future: better scouts, new players, new facilities for the youth teams. That is more so if in your team you have another player that is going to be one of the best in the world in the next few years. In the player transfer market, like in auctions or takeovers, the selling parties usually have more bargaining power, and buyers in soccer tend to overpay for strikers. I would not wait to sell Messi after the next World Cup, which is played in Brasil, and the likelihood that Messi and Argentina will fulfill their exaggerated expectations is low. Most probably, Messi will lose value during the World Cup, even if he does not get injured again during it or just before it. Messi has won four times the Ballon d’Or, and has been free of injuries for four or five seasons. That will hardly happen again. Of course, all this is a prediction, and events may prove me wrong, but I try to stick to the rules of expert Nate Silver in making predictions: combine data, past experiences and informed intuitions. Also, it may happen that he is sold but that FC Barcelona runs into other problems (like not sacking other players that have their mind more in the gossip magazines than on the pitch) and stops winning for other reasons. However, FC Barcelona probably will not sell him, because of the confluence of the endowment effect and populism. Due to the endowment effect, a well-known bias in behavioral economics, economic agents overestimate the value of assets they possess relative to the same assets when they do not possess them. Populism is pervasive in modern soccer especially in large markets like Barcelona, where two sports newspapers and an army of talk shows and media journalists compete to keep lots of voting and influencing fans excited. In the direct democracy of the best European clubs, the short run passions of fans have more power than their long run interests (these not being to maximize profits, but the probabilities of winning in the future). Fans should be protected from their short run selves: that is the broader lesson.

Optimal marginal income tax rates

In the United States the marginal tax rates (ie, what the wealthy pay for what they earn above a certain threshold ) of the income tax were very high after the second world war. In the recent decades, they declined dramatically.
The debate on this issue has been reactivated as a result of French president Hollande 's promise to raise the marginal rate of the income tax to 75 % (the promise has been  fulfilled, but for a very high threshold and for corporations, which has received protests from the rich, especially football clubs), and the movement "Occupy Wall Street", which had as one of its slogans "We are the 99 %" , as a reference to the fact that economic growth in recent decades only benefited the richest 1%.
Apart from the historical evidence, the interesting thing is that the best economists who have studied this believe that a top marginal rate above 70 % is desirable,  meaning that it is socially optimal, because contrary to what the right says, it would not create a major disincentive to wealth creation, and would allow for ambitious distributional programs.
Paul Krugman has repeatedly referred to this in his blog, for example here and here.
There is a very interesting book with articles by some of the leading experts on the subject (Sáez, Piketty, Diamond) which is the "Occuppy Handbook". It is a very interesting book with articles by leading economists of the highest academic level that support progressive proposals. Incidentally, it is interesting that this book does not show any Spanish economist.